Question

During Heaton Company’s first two years of operations, it reported absorption costing net operating income as follows:

	Year 1			Year 2
Sales (@ $63 per unit)	$	1,134,000		$	1,764,000
Cost of goods sold (@ $41 per unit)		738,000			1,148,000
Gross margin		396,000			616,000
Selling and administrative expenses*		300,000			330,000
Net operating income	$	\96,000\		$	286,000

* $3 per unit variable; $246,000 fixed each year.

The company’s $41 unit product cost is computed as follows:

Direct materials	$	7
Direct labor		10
Variable manufacturing overhead		4
Fixed manufacturing overhead ($460,000 ÷ 23,000 units)		20
Absorption costing unit product cost	$	41

Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder consists of depreciation charges on production equipment and buildings.

Production and cost data for the first two years of operatons are:

	Year 1	Year 2
Units produced	23,000	23,000
Units sold	18,000	28,000

Required:

1. Using variable costing, what is the unit product cost for both years?

2. What is the variable costing net operating income in Year 1 and in Year 2?

3. Reconcile the absorption costing and the variable costing net operating income figures for each year.

req 1

Using variable costing, what is the unit product cost for both years?

	Unit product cost

req 2

What is the variable costing net operating income in Year 1 and in Year 2?

	Year 1 Year 2 Net operating income (loss)

req 3

Reconcile the absorption costing and the variable costing net operating income figures for each year. (Enter any losses or deductions as a negative value.)

	Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes Year 1 Year 2 Variable costing net operating income (loss) Absorption costing net operating income

Answer 1